L & A MUTUAL INSURANCE COMPANY FINANCIAL STATEMENTS AS AT DECEMBER 31, 2013

Transcription

1 FINANCIAL STATEMENTS AS AT DECEMBER 31, 2013

2 TABLE OF CONTENTS AS AT DECEMBER 31, 2013 INDEPENDENT AUDITORS' REPORT 1 FINANCIAL STATEMENTS Balance Sheet 2 Statement of Surplus and Resources for Protection of Policyholders 3 Statement of Comprehensive Income 4 Statement of Cash Flows 5 Page Notes to Financial Statements 6-37

3 WILKINSON Integrity, Knowledge, Solutions To the Policyholders of L & A Mutual Insurance Company Report on the Financial Statements INDEPENDENT AUDITORS' REPORT We have audited the accompanying financial statements of L & A Mutual Insurance Company, which comprise the balance sheet as at December 31, 2013 and the statements of surplus and resources for protection of policyholders, comprehensive income and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of L & A Mutual Insurance Company as at December 31, 2013 and the results of its operations and its cash flows for the year then ended, in accordance with International Financial Reporting Standards. BELLEVILLE, Canada January 23, 2014 Chartered Accountants Licensed Public Accountants Wilkinson & Company LLP - Chartered Accountants

4 BALANCE SHEET AS AT DECEMBER 31, ASSETS Cash 1,007, ,802 Portfolio investments - Note 4 10,839,912 9,937,173 Accrued investment income 49,684 47,459 Accounts receivable - Agents and policyholders 2,625,625 2,624,949 - Other - Note 5 217, ,372 Reinsurers' share of provisions for unpaid claims and adjustment expenses - Note 5 929, ,105 Deferred policy acquisition expenses - Note 5 746, ,376 Property, plant and equipment - Note 6 573, ,151 Intangible assets - Note 6 5,144 12,756 Deferred income taxes - Note 7 27,000 46,000 17,021,613 15,443,143 LIABILITIES Accounts payable and accrued liabilities 365, ,264 Income taxes payable 64,901 9,899 Provision for unpaid claims and adjustment expenses - Note 5 4,678,788 3,868,747 Unearned premiums - Note 5 4,775,958 4,795,087 POLICYHOLDERS' SURPLUS 9,884,999 9,121,997 Surplus and resources for protection of policyholders 7,136,614 6,321,146 APPROVED ON BEHALF OF THE BOARD Director Director 17,021,613 15,443,143 The accompanying notes form an integral part of these financial statements

5 STATEMENT OF SURPLUS AND RESOURCES FOR PROTECTION OF POLICYHOLDERS BALANCE - BEGINNING OF YEAR 6,321,146 6,021,336 COMPREHENSIVE INCOME FOR YEAR 815, ,810 BALANCE - END OF YEAR 7,136,614 6,321,146 The accompanying notes form an integral part of these financial statements

6 4 L & A MUTUAL INSURANCE COMPANY STATEMENT OF COMPREHENSIVE INCOME PREMIUM INCOME Gross premiums written 9,363,920 9,335,566 Less reinsurance premiums (2,388,593) (2,626,819) Net premiums written 6,975,327 6,708,747 Decrease (increase) in unearned premiums 19,197 (212,707) Net premiums earned 6,994,524 6,496,040 Service charges 138, ,869 7,133,305 6,625,909 DIRECT LOSSES INCURRED Gross claims and adjusting expenses (including salaries and benefits 121,224; ,181) 5,161,186 4,358,852 Less reinsurers' share of claims and adjusting expenses (1,295,024) (426,777) 3,866,162 3,932,075 3,267,143 2,693,834 EXPENSES Commissions 1,404,249 1,373,200 Salaries and benefits 746, ,423 Advertising and promotion 39,776 43,858 Bank charges and interest 48,900 46,749 Professional fees 38,555 28,805 Loss prevention 98,108 85,453 Travel and education 59,883 56,939 Other expenses 66,853 89,910 Office, printing and telephone 74,259 86,962 Computer expenses 112, ,519 Insurance 13,532 16,526 Ontario premium taxes 26,823 25,687 Association, bureau fees and donations 43,563 40,709 Building occupancy costs 42,190 33,921 Depreciation of property, plant and equipment and intangibles 52,815 59,242 2,868,664 2,644,903 UNDERWRITING PROFIT 398,479 48,931 OTHER INCOME (EXPENSES) Refund of premium - Farm Mutual Reinsurance Plan Inc. 88,774 Investment income - Note , ,693 Management fees - portfolio investments (63,733) (57,814) 551, ,879 COMPREHENSIVE INCOME BEFORE INCOME TAXES 950, ,810 INCOME TAX EXPENSE (RECOVERY) Current - Note 7 116,000 53,000 Deferred - Note 7 19,000 (19,000) 135,000 34,000 COMPREHENSIVE INCOME FOR YEAR 815, ,810 The accompanying notes form an integral part of these financial statements

7 STATEMENT OF CASH FLOWS OPERATING ACTIVITIES Comprehensive income for year 815, ,810 Adjustment for items which do not affect cash - Depreciation of property, plant and equipment 52,815 59,242 Gain on sale of portfolio investments (realized and unrealized) - Note 10 (242,083) (45,544) Deferred income taxes 19,000 (19,000) 645, ,508 Net change in non-cash working capital balances related to operations - Note 8 309, ,442 CASH FLOWS PROVIDED FROM OPERATING ACTIVITIES 954, ,950 INVESTING ACTIVITIES Purchase of portfolio investments (7,354,380) (6,817,236) Proceeds on sale of portfolio investments 6,693,724 6,263,066 Purchase of property, plant and equipment (13,510) (97,600) CASH FLOWS USED IN INVESTING ACTIVITIES (674,166) (651,770) INCREASE IN CASH AND CASH EQUIVALENTS FOR YEAR 280,320 75,180 CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 726, ,622 CASH AND CASH EQUIVALENTS - END OF YEAR 1,007, ,802 REPRESENTED BY: Cash 1,007, ,802 The accompanying notes form an integral part of these financial statements

8 6 1. NATURE OF BUSINESS OPERATIONS (a) Reporting Entity The Company was incorporated without share capital in August, 1876 under the laws of the Province of Ontario as a mutual insurance company and is subject to the Ontario Insurance Act. It is licenced to conduct its principal business activity which is to write property, liability and automobile insurance in Ontario. The Company's head office is located on 32 Mill Street East, Napanee, Ontario. The Company is subject to rate regulation in the automobile business that it writes. Before automobile insurance rates can be changed, a rate filing is prepared as a combined filing for most Ontario Farm Mutuals by the Farm Mutual Reinsurance Plan Inc. The rate filing must include actuarial justification for rate increases or decreases. All rate filings are approved or denied by the Financial Services Commission of Ontario. Rate regulation may affect the automobile revenues that are earned by the Company. The actual impact of rate regulation would depend on the competitive environment at the time. These financial statements have been authorized for issue by the Board of Directors on January 23, (b) Basis of Presentation These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (the IASB). These financial statements were prepared under the historical cost convention. The Company presents the balance sheet based on order of liquidity with a distinction based on expectations regarding recovery or settlement within twelve months after the balance sheet date (current) and more than twelve months after the balance sheet date (non-current) presented in the notes. The following balances are generally classified as current unless otherwise noted in these financial statements, cash, portfolio investments, accrued investment income, accounts receivable, reinsurance share of provisions for unpaid claims and adjustment expenses, deferred policy acquisition expenses, accounts payable and accrued liabilities, income taxes payable, provision for unpaid claims and adjustment expenses and unearned premiums. The following balances are generally classified as non-current unless otherwise noted in these financial statements, property, plant and equipment, intangible assets and deferred income taxes. The Company's functional and presentation currency is the Canadian dollar. The preparation of financial statements in compliance with IFRS requires management to make certain critical accounting estimates. It also requires management to exercise judgment in applying the Company's accounting policies. The areas involving a higher degree of judgment of complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 2(a).

9 7 2. ACCOUNTING POLICIES The Company follows International Financial Reporting Standards, which comply with the requirements for filing with the Financial Services Commission of Ontario. Those accounting policies considered to be particularly significant are as follows: (a) Accounting Estimates The Company makes estimates and assumptions about the future that affect the reported amounts of assets and liabilities. Estimates and judgments are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions. The effect of a change in an accounting estimate is recognized prospectively by including it in comprehensive income in the period of the change, if the change effects that period only; or in the period of the change and future periods, if the change affects both. The estimates and assumptions that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below: (i) Provision for Unpaid Claims The estimation of the provision for unpaid claims and the related reinsurers' share are the Company's most critical accounting estimates. There are several sources of uncertainty that need to be considered by the Company in estimating the amount that will ultimately be paid on these claims. The uncertainty arises because all events affecting the ultimate settlement of claims have not taken place and may not take place for some time. Changes in the estimate of the provision can be caused by receipt of additional claim information, changes in judicial interpretation of contracts, or significant changes in severity or frequency of claims from historical trends. The estimates are based on the Company's historical experience and industry experience. More details are included in Note 5. (ii) Income Taxes The Company periodically assesses its liabilities and contingencies related to income taxes for all years open to audit based on the latest information available. For matters where it is probable that an adjustment will be made, the Company records its best estimate of the tax liability including the related interest and penalties in the current tax provision. Management believes they have adequately provided for the probable outcome of these matters; however, the final outcome may result in a materially different outcome than the amount included in the tax liabilities.

10 8 2. ACCOUNTING POLICIES (Cont'd) (b) Insurance Contracts In accordance with IFRS 4, Insurance Contracts, the Company has continued to apply the accounting policies it applied in accordance with pre-changeover Canadian GAAP. Balances arising from insurance contracts primarily include unearned premiums, provisions for unpaid claims and adjustment expenses, the reinsurers' share of provisions for unearned premiums and unpaid claims and adjustment expenses, deferred policy acquisition expenses, and salvage and subrogation recoverable. (i) Premiums and Unearned Premiums Premiums written comprise the premiums on contracts incepting in the financial year. Premiums written are stated gross of commissions' payable to agents and exclusive of taxes levied on premiums. The Company earns premium income evenly over the term of the insurance policy generally using the pro rata method. The portion of the premium related to the unexpired portion of the policy at the end of the fiscal year is reflected in unearned premiums. (ii) Reinsurers' Share of Unearned Premiums The reinsurers' share of unearned premiums are recognized as an asset using principles consistent with the Company's method for determining the unearned premium liability. The amount reflected on the balance sheet is on a gross basis to indicate the extent of credit risk related to the reinsurance and its obligations to policyholders. (iii) Deferred Policy Acquisition Expenses Acquisition costs are substantially comprised of agents' commissions. These costs are deferred and amortized over the terms of the related policies to the extent that they are considered to be recoverable from unearned premiums, after considering the related anticipated claims and expenses.

11 9 2. ACCOUNTING POLICIES (Cont'd) (b) Insurance Contracts (Cont'd) (iv) Provisions for Unpaid Claims and Adjustment Expenses Individual loss estimates are provided on each claim reported. In addition, provisions are made for adjustment expenses, changes in reported claims and for claims incurred but not reported, based on past experience and business in force. The estimates are regularly reviewed and updated, and any resulting adjustments are included in current income. Claim liabilities are carried on an undiscounted basis. (v) Liability Adequacy Test At each reporting date, the Company performs a liability adequacy test on its insurance liabilities less deferred policy acquisition expenses to ensure the carrying value is adequate, using current estimates of future cash flows, taking into account the relevant investment return. If that assessment shows that the carrying amount of the liabilities is inadequate, any deficiency is recognized as an expense to the income statement initially writing off the deferred policy acquisition expense and subsequently by recognizing an additional claims liability for claims provisions. (vi) Reinsurers' Share of Provisions for Unpaid Claims and Adjustment Expenses The Company enters into reinsurance contracts in the normal course of business in order to limit potential losses arising from certain exposures. Reinsurance premiums are accounted for in the same period as the related premiums for the direct insurance business being reinsured. Reinsurance liabilities, comprised of premiums payable for the purchase of reinsurance contracts, are included in accounts payable and accrued liabilities and are recognized as an expense when due. Expected reinsurance recoveries on unpaid claims and adjustment expenses are recognized as assets at the same time and using principles consistent with the Company's method for establishing the related liability. (vii) Salvage and Subrogation Recoverable In the normal course of business, the Company obtains the ownership of damaged property, which they resell to various salvage operations. Unsold property is valued at its estimated net realizable value. Where the Company indemnifies policyholders against a liability claim, it acquires rights to subrogate its claim against other parties. These claims are recognized when funds are received.

12 10 2. ACCOUNTING POLICIES (Cont'd) (b) Insurance Contracts (Cont'd) (viii) Refund from Premium Under the discretion of the Board of Directors, the Company may declare a refund to its policyholders based on the premiums paid in the fiscal period. This refund is recognized in the statement of comprehensive income. (c) Structured Settlements, Fire Mutuals Guarantee Fund and Financial Guarantee Contracts The Company has the ability to enter into annuity agreements with various life insurance companies to provide for fixed and recurring payments to claimants. Under such arrangements, the Company's liability to its claimants is substantially transferred, although the Company remains exposed to the credit risk that life insurers fail to fulfil their obligations. The Company is a member of the Fire Mutuals Guarantee Fund ("the Fund"). The Fund was established to provide payment of outstanding policyholders' claims if a member company becomes bankrupt. As a result, the Company may be required to contribute assets to their proportionate share in meeting this objective. These exposures represent financial guarantee contracts. The Company accounts for financial guarantee contracts in accordance with IFRS 4, Insurance Contracts. (d) Financial Instruments The Company classifies its financial instruments into one of the following categories based on the purpose for which the asset was acquired or liability incurred. All transactions related to financial instruments are recorded on a trade date basis. The Company's accounting policy for each category is as follows: (i) Loans and Receivables These assets are non-derivative financial assets resulting from the delivery of cash or other assets by a lender to a borrower in return for a promise to repay on a specified date or dates, or on demand. They are initially recognized at fair value plus transaction costs that are directly attributable to their acquisition or issue and subsequently carried at amortized cost, using the effective interest rate method, less any impairment losses. Impairment provisions are recognized when there is objective evidence (such as significant financial difficulties on the part of the counterparty or default or significant delay in payment) that the Company will be unable to collect all of the amounts due under the terms receivable, the amount of such a provision being the difference between the net carrying amount and the present value of the future expected cash flows associated with the impaired receivable. For amounts due from policyholders and reinsurers, which are reported net, such provisions are recorded in a separate allowance account with the loss being recognized in comprehensive income. On confirmation that the amounts receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision.

13 11 2. ACCOUNTING POLICIES (Cont'd) (d) Financial Instruments (Cont'd) (ii) Fair Value Through Profit and Loss Investments Financial assets at fair value through profit and loss are financial assets held for trading. A financial asset is classified in this category if it is acquired principally for selling in the short term. Derivatives are also classified as held for trading unless they are designated hedges. Fair value through profit and loss instruments are carried at fair value in the balance sheet with changes in fair value recorded in the statement of comprehensive income. Purchases and sales of equity instruments are recognized on settlement date. (iii) Other Financial Liabilities Other financial liabilities include all financial liabilities and comprise accounts payables, and other short-term monetary liabilities. These liabilities are initially recognized at fair value net of any transaction costs directly attributable to the issuance of the instrument and subsequently carried at amortized cost using the effective interest rate method, which ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liability carrying in the balance sheet. Interest expense in this context includes initial transaction costs and premium's payable on redemption, as well as any interest or coupon payable while the liability is outstanding. (iv) Classification Cash and cash equivalents are classified as fair value through profit and loss. Receivables are classified as loans and receivables, which are measured at amortized cost. Portfolio investments are classified in accordance with Note 2(e) below. Accounts payable and accrued liabilities, due to reinsurers and other insurance companies and structured settlements are classified as other financial liabilities, which are measured at amortized cost. (e) Portfolio Investments Portfolio investments invested are classified as fair value through profit and loss, and are initially recorded at their acquisition cost on the date of trade. Portfolio investments are subsequently adjusted to fair value as at the date of the balance sheet, and the corresponding unrealized gains and losses are recorded in income.

14 12 2. ACCOUNTING POLICIES (Cont'd) (f) Property, Plant and Equipment and Depreciation Property, plant and equipment are stated at acquisition cost and subsequently measured at cost less accumulated depreciation and accumulated impairment losses. Gains or losses on the disposal of individual assets are recognized in income in the year of disposal. Depreciation is provided on the basis as detailed below: Asset Basis Rate Building Declining balance 5% Land and parking improvements Declining balance 8% Computer equipment Straight-line 3 years Office furniture and fixtures Declining balance 20% Depreciation methods and useful lives are reviewed annually and adjusted if necessary. (g) Intangible Assets Intangible assets consist of computer software which are not integral to the computer hardware owned by the Company. Software is initially recorded at cost and subsequently measured at cost less accumulated amortization and accumulated impairment losses. Software is amortized on a straight-line basis over 3 years. (h) Income Taxes Income tax expense is comprised of current and deferred tax. Current tax and deferred tax are recognized in comprehensive income except to the extent that it relates to a business combination, or items recognized directly in equity or in other earnings. Current income taxes are recognized for the estimated income taxes payable or receivable on taxable income or loss for the current year and any adjustment to income taxes payable in respect of previous years. Current income taxes are determined using tax rates and tax laws that have been enacted or substantively enacted by the year-end date. Deferred tax assets and liabilities are recognized where the carrying amount of an asset or liability differs from its tax base, except for taxable temporary differences arising on the initial recognition of goodwill and temporary differences arising on the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting or taxable profit or loss. Recognition of deferred tax assets for unused tax losses, tax credits and deductible temporary differences is restricted to those instances where it is probable that future taxable profit will be available against which the deferred tax asset can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

15 13 2. ACCOUNTING POLICIES (Cont'd) (h) Income Taxes (Cont'd) The amount of the deferred tax asset or liability is measured at the amount expected to be recovered from or paid to the taxation authorities. This amount is determined using tax rates and tax laws that have been acted or substantively enacted by the year-end date and are expected to apply when the liabilities / (assets) are settled / (recovered). (i) Provisions Provisions are recognized for liabilities of uncertain timing or amount that have arisen as a result of past transactions, including legal, equitable or constructive obligations. The provision is measured at the best estimate of the expenditure required to settle the obligation at the reporting date. (j) Accounts Receivable Accounts receivable are classified as loans and receivables and are measured at initial recognition at fair value and are expected to be settled within one year. Appropriate allowances for estimated irrecoverable amounts are recognized in profit or loss when there is objective evidence that the asset is impaired. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments (more than 90 days overdue) are considered indicators that the trade receivable is impaired. The carrying amount of the asset is reduced through the direct write-down of the asset in the statement of comprehensive income. Subsequent recoveries of amounts previously written off are credited against operating expenses in the statement of comprehensive income. (k) Pension plan The Company participates in a multi-employer defined benefit pension plan, however, sufficient information is not available to use defined benefit accounting. Therefore, the company accounts for the plan as if it were a defined contribution plan, recognizing contributions including deficit payments as an expense in the year to which they relate. (l) Cash and Equivalents Cash and equivalents consist of cash on deposit.

16 14 2. ACCOUNTING POLICIES (Cont'd) (m) Standards, Amendments and Interpretations Not Yet Effective Certain new standards, amendments and interpretations have been published that are mandatory for the Company's accounting periods beginning on or after January 1, 2013 or later periods that the Company has decided not to early adopt. The standards, amendments and interpretations that will be relevant to the Company are: IAS 36 - Impairment of Assets - This was amended to more appropriately reflect the IASB's intent with respect to disclosures of fair value measurement. Specifically, this pertains to fair value measurement when the recoverable amount of impaired assets is based on fair value less costs of disposal. This amendment is effective for years beginning on or after January 1, IAS 32 - Financial Instruments: Presentation - This standard was amended to clarify requirements for offsetting of financial assets and financial liabilities. This amendment is effective for years beginning on or after January 1, IFRS 7 - Financial Instruments: Disclosures - This was amended to require additional disclosure on transition from IAS 39 to IFRS 9. This amendment is effective for years beginning on or after January 1, IFRS 9 - Financial Instruments: Classification and Measurement - This standard will replace IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9 has two measurement categories: amortized cost and fair value. All equity instruments are measured at fair value. A debt instrument is measured at amortized cost only if the entity is holding it to collect contractual cash flows and the cash flows represent principal and interest. Otherwise, it is measured at fair value through profit or loss. This standard is effective for years beginning on or after January 1, OSFI has indicated it will not allow early adoption of this standard for federally regulated financial institutions.

17 15 3. FINANCIAL INSTRUMENT CLASSIFICATION The carrying amount of the Company's financial instruments by classification is as follows: Fair value Other through profit Loans and Financial and loss Receivables Liabilities Total December 31, 2013 Cash 1,007,122 1,007,122 Portfolio investments - Note 4 10,839,912 10,839,912 Accrued investment income 49,684 49,684 Accounts receivable - Agents and policyholders 2,625,625 2,625,625 - Other - Note 5 217, ,175 Accounts payable and accrued liabilities (365,352) (365,352) 11,847,034 2,892,484 (365,352) 14,374,166 December 31, 2012 Cash 726, ,802 Portfolio investments - Note 4 9,937,173 9,937,173 Accrued investment income 47,459 47,459 Accounts receivable - Agents and policyholders 2,624,949 2,624,949 - Other - Note 5 183, ,372 Accounts payable and accrued liabilities (448,264) (448,264) 10,663,975 2,855,780 (448,264) 13,071,491

18 16 4. PORTFOLIO INVESTMENTS As noted in Note 2(e) to these financial statements, portfolio investments are classified as fair value through profit and loss and are adjusted to market value as at the balance sheet. The cost and market values of the investments are as follows: Cost Fair Value Cost Fair Value Money Market Fund 344, ,995 1,485,952 1,485,952 Term deposits 45,000 45, , ,000 Canadian Treasury Bills 412, , , ,134 Fixed income-securities 802, ,128 2,243,086 2,243,086 Federal government 4,247,791 4,171,117 3,322,483 3,391,338 Provincial government & Provincially guaranteed 883, , , ,862 Canadian Corporate 2,446,793 2,428,783 1,955,817 2,006,280 7,578,179 7,470,055 6,029,080 6,150,480 Guarantee Fund 21,267 21,267 20,619 20,619 Preference shares, common shares and income trusts 2,109,477 2,546,462 1,484,778 1,522,988 10,511,031 10,839,912 9,777,563 9,937,173 The effective interest rates range from % to 4.066% (1.267% to 4.066% for December 31, 2012). The maximum exposure to credit risk would be the carrying value (fair value) as shown above.

19 17 4. PORTFOLIO INVESTMENTS (Cont'd) Fair Value The estimated market value of bonds and debentures are based on quoted market values. The estimated market value of preference and common shares are determined using the last bid price. Maturity Profile The expected maturity dates for fixed-income securities and term deposits are as follows: Maturing within one year 45, ,000 Maturing between one and five years 5,071,180 1,713,143 Maturing over five years 2,398,875 4,482,337 7,515,055 6,570, INSURANCE CONTRACTS Accounts Receivable - Other Due from reinsurers, beginning of the year NIL 10,142 Submitted to reinsurer 850, ,292 Received from reinsurer (841,876) (704,434) Due from reinsurers, end of the year 9,120 NIL Due from facility 70,369 70,166 Due from risk sharing pool 137, ,206 Accounts receivable - other 217, ,372 Expected settlement Within one year 217, ,372 More than one year NIL NIL At year end, the Company reviewed the amounts owing from its reinsurer and determined that no allowance is necessary.

20 18 5. INSURANCE CONTRACTS (Cont'd) Reinsurers Share of Provision for Unpaid Claims Balance, beginning of the year 510, ,514 New claims reserve 1,028, ,515 Change in prior years reserve 241,628 (71,632) Submitted to reinsurer (850,995) (694,292) Balance, end of the year 929, ,105 Expected settlement Within one year 556, ,658 More than one year 372, ,447 Deferred Policy Acquisition Expenses Balance, beginning of the year 749, ,069 Acquisition costs incurred 1,401,662 1,397,507 Expensed during the year (1,404,249) (1,373,200) Balance, end of the year 746, ,376 Deferred policy acquisition expenses will be recognized as an expense within one year. Unearned Premiums (UEP) Balance, beginning of the year 4,795,087 4,583,170 Premiums written 9,363,920 9,335,566 Premiums earned during year (9,383,049) (9,123,649) Changes in UEP recognized in income (19,129) 211,917 Balance, end of the year 4,775,958 4,795,087

21 19 5. INSURANCE CONTRACTS (Cont'd) The determination of the provision for unpaid claims and adjustment expenses and the related reinsurers' share requires the estimation of the following variables: development of claims and reinsurance recoveries. The estimates are based on the Company's historical experience and classified as follows: Gross Ceded Gross Ceded Short settlement term 1,783, , , ,658 Long settlement term 992, ,930 1,136, ,447 Facility association and other residual pools 263, ,045 Provision for claims incurred but not reported 1,640,000 1,620,000 4,678, ,704 3,868, ,105 Short settlement term is defined as expected settlement within one year, long term settlement is defined as expected settlement of more than one year. Comments and Assumptions for Specific Claims Categories The ultimate cost of long term settlement general liability claims are difficult to predict for several reasons. Claims may not be reported until many years after a policy expires. Changes in the legal environment have created further complications. Court decisions and federal and provincial legislation may dramatically increase the liability between the time a policy is written and associated claims are ultimately resolved. For example, liability for exposure to toxic substances and environmental impairment, which did not appear likely or even exist when the policies were written, has been imposed by legislators and judicial interpretation. Tort liability has been expanded by some jurisdictions to cover defective workmanship. Provisions for such difficult-to-estimate liabilities are established by examining the facts of tendered claims and adjusted in the aggregate for ultimate loss expectations based upon historical experience patterns and current socioeconomic trends. The Company must participate in industry automobile residual pools of business and recognizes a share of this business based on its automobile market share. The Company records its share of the liabilities provided by the actuaries of the pools.

22 20 5. INSURANCE CONTRACTS (Cont'd) Claims and Adjustment Expenses Changes in claim liabilities recorded in the balance sheet for the years ended December 31, 2013 and 2012 and their impact on claims and adjustment expenses for the two years follow: Unpaid claim liabilities, beginning of year 3,868,747 3,596,096 Decrease in estimated losses and expenses for losses occurring in prior years (702,420) (750,908) Provision for losses and expenses on claims occurring in the current year 5,874,918 5,137,371 Payment on claims: Current year (2,849,355) (2,964,922) Prior years (1,513,102) (1,148,890) Unpaid claims, end of year 4,678,788 3,868,747 Reinsurer's share and subrogation recoverable 929, ,105 Unpaid claims, end of year - net 3,749,084 3,358,642 The change in estimate of losses occurring in prior years is due to changes arising from new information received.

23 21 5. INSURANCE CONTRACTS (Cont'd) Provision for Unpaid Claims and Adjustment Expenses The determination of the provision for unpaid claims and adjustment expenses and the related reinsurers' share requires the estimation of three major variables which are the development of claims, reinsurance recoveries and future investment income. The Superintendent of the Financial Services Commission of Ontario has required that consideration of future investment income be disregarded except in the evaluation of automobile accident benefit claims. Claim Development The estimation of claim development involves assessing the future behaviour of claims, taking into consideration the consistency of the Company's claim handling procedures, the amount of information available, the characteristics of the line of business from which the claim arises and historical delays in reporting claims. In general, the longer the term required for the settlement of a group of claims the more variable the estimates. Short settlement term claims are those which are expected to be substantially paid within a year of being reported. The tables that follow present the development of claims payments and the estimated ultimate cost of claims for the claim year 2007 to The first table presents the claims at gross and the second table presents the claims net of reinsurance recoveries. The upper half of the tables shows the cumulative amounts paid or estimated to be paid during successive years related to each claim year. The original estimates will be increased or decreased, as more information becomes known about the original claims and overall claim frequency and severity. In 2013, only information from periods beginning on or after January 1, 2007 is required to be disclosed. This is being increased in each succeeding additional year, until ten years of information in included.

24 22 5. INSURANCE CONTRACTS (Cont'd) Gross Claims 2007 (000's) 2008 (000's) 2009 (000's) 2010 (000's) 2011 (000's) 2012 (000's) 2013 (000's) Total (000's) Gross estimate of cumulative claims costs At the end year of claim 3,996 4,567 3,965 6,477 6,533 5,362 5,875 One year later 3,377 4,088 3,297 5,336 5,737 4,878 Two years later 3,223 3,605 3,093 5,133 5,652 Three years later 3,071 3,445 3,073 4,980 Four years later 2,629 3,465 3,073 Five years later 2,511 3,473 Six years later 2,511 Current estimate of cumulative claims cost 2,511 3,473 3,073 4,980 5,652 4,878 5,875 30,442 Cumulative payments 2,511 3,467 2,986 4,896 4,987 4,079 2,837 25,763 Outstanding claims NIL ,038 4,679 Outstanding claims 2006 and prior NIL Provision for unpaid claims and expenses ,038 4,679

25 23 5. INSURANCE CONTRACTS (Cont'd) Net Claims 2007 (000's) 2008 (000's) 2009 (000's) 2010 (000's) 2011 (000's) 2012 (000's) 2013 (000's) Total (000's) Net estimate of cumulative claims costs At the end year of claim 2,964 3,417 3,451 5,043 5,500 4,890 5,085 One year later 2,652 3,019 2,862 4,244 4,703 4,038 Two years later 2,529 2,682 2,667 4,112 4,520 Three years later 2,402 2,524 2,619 3,932 Four years later 2,234 2,545 2,607 Five years later 2,234 2,552 Six years later 2,234 Current estimate of cumulative claims cost 2,234 2,552 2,607 3,932 4,520 4,038 5,085 24,968 Cumulative payments 2,234 2,546 2,560 3,894 4,146 3,507 2,332 21,219 Outstanding claims NIL ,753 3,749 Outstanding claims 2006 and prior NIL Total net outstanding claims net of reinsurance 3,749

26 24 6. PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLES Cost Land Building Property, plant and Equipment Parking Lot Computer Equipment Office Furniture and Fixtures Total Intangibles Computer Software Balance on December 31, , ,799 17, ,044 75, ,224 35,389 Additions 6,497 7,013 13,510 Balance on December 31, , ,799 17, ,541 82, ,734 35,389 Accumulated Depreciation Balance on December 31, 2012 NIL 69,965 3,890 86,861 45, ,073 22,633 Depreciation expense NIL 23,042 1,095 14,260 6,806 45,203 7,612 Balance on December 31, 2013 NIL 93,007 4, ,121 52, ,276 30,245 Net book value December 31, , ,834 13,686 19,183 30, ,151 12,756 December 31, , ,792 12,591 11,420 30, ,458 5,144 The Company's land and buildings were last valued at January 1, Land and buildings were subject to external valuation performed by F.G. Myatt Commercial Appraisal Services, qualified professional valuers adhering to the generally accepted Standards of Professional Practice (CUSPAP) and the Code of Ethics of the Appraisal Institute of Canada. The fair value of land and buildings is determined by the "Income Approach to Value" and on comparable market transactions. Had land and buildings not been accounted for using the revaluation model, on a historical cost basis, their net book values would have been approximately 13,000 and 410,000 ( ,000 and 432,000).

27 25 7. INCOME TAX INFORMATION The Company has a reduced effective income tax rate due to eligibility for the small business deduction and exemptions within the Income Tax Act for a proportion of its taxable income relating to insuring farm related risks. The significant components of tax expense included in net income are composed of: Current Tax Expense Based on current year taxable income 116,000 53,000 Deferred Tax Expense Origination and reversal of temporary differences 20,100 (19,000) Increase in tax rate (1,100) 19,000 (19,000) Total income tax expense 135,000 34,000 Reasons for the difference between tax expense for the year and the expected income taxes based on the effective statutory tax rate are as follows: Net income for the year 950, ,810 Effective statutory rate % % Expected taxes based on the effective statutory rate 171,084 51,741 Income from insuring farm related risks (14,635) (6,692) Non-taxable dividends (7,147) (3,290) Non-taxable portion of unearned premiums and deferred acquisition costs (37,735) 2,802 Depreciation in excess of capital cost allowance 792 2,349 Non-deductible portion of claims liabilities 3,514 4,875 Other non-deductible expenses Other (559) 516 Total income tax expense 116,000 53,000 Adjustments to the opening carrying value of temporary differences based on changes to the federal and provincial tax rates result in changes to deferred income tax payable and is reflected in deferred income taxes.

28 26 7. INCOME TAX INFORMATION (Cont'd) The movement in 2013 deferred tax assets (liabilities) are: Opening Balance at January 1, 2013 Recognize in Net Income Closing Balance at December 31, 2013 Deferred Tax Assets Unearned premiums 28,900 (28,900) Claims liabilities 23,100 10,600 33,700 Other 2, ,600 Deferred tax asset 54,800 (17,500) 37,300 Deferred Tax Liabilities Property, plant and equipment (7,800) (1,600) (9,400) Intangible assets (1,000) 100 (900) Deferred tax liability (8,800) (1,500) (10,300) 2013 net deferred income taxes asset movement 46,000 (19,000) 27,000

29 27 7. INCOME TAX INFORMATION (Cont'd) The movement in 2012 deferred tax assets (liabilities) are: Deferred Tax Assets Opening Balance at January 1, 2012 Recognize in Net Income Closing Balance at December 31, 2012 Unearned premiums 26,400 2,500 28,900 Claims liabilities 18,800 4,300 23,100 Other 4,000 (1,200) 2,800 Deferred tax asset 49,200 5,600 54,800 Deferred Tax Liabilities Property,plant and equipment (20,500) 12,700 (7,800) Intangible assets (1,700) 700 (1,000) Deferred tax liability (22,200) 13,400 (8,800) 2012 net deferred income taxes asset movement 27,000 19,000 46, Deferred Tax Assets Deferred tax assets to be recovered within 12 months 14,600 36,800 Deferred tax assets to be recovered after more than 12 months 22,700 18,000 37,300 54,800 Deferred Tax Liability Deferred tax liabilities to be settled within 12 months (900) (1,000) Deferred tax liabilities to be settled after more than 12 months (9,400) (7,800) (10,300) (8,800) Net deferred income taxes asset movement 27,000 46,000

30 28 8. NET CHANGE IN NON-CASH WORKING CAPITAL BALANCES RELATED TO OPERATIONS Cash provided from (used in) non-cash working capital is compiled as follows: (INCREASE) DECREASE IN CURRENT ASSETS Accrued interest (2,225) (4,110) Accounts receivable - agents and policyholders (676) (236,349) Accounts receivable - other (33,803) (9,233) Reinsurers' share of provision for unpaid claims and adjustment expenses (419,599) 356,409 Deferred policy acquisition expenses 2,587 (24,307) INCREASE (DECREASE) IN CURRENT LIABILITIES (453,716) 82,410 Accounts payable and accrued liabilities (82,912) (79,510) Income taxes payable 55,002 (55,026) Provision for unpaid claims and adjustment expenses 810, ,651 Unearned premiums (19,129) 211, , ,032 NET CHANGE IN NON-CASH WORKING CAPITAL BALANCES RELATED TO OPERATIONS 309, ,442

31 29 9. INSURANCE RISK MANAGEMENT The principal risk the Company faces under insurance contracts is that the actual claims and benefit payments or the timing thereof, differ from expectations. This is influenced by the frequency of claims, severity of claims, actual benefits paid and subsequent development of long-term claims. Therefore, the objective of the Company is to ensure that sufficient reserves are available to cover these liabilities. The above risk exposure is mitigated by diversification across a large portfolio of insurance. The variability of risks is also improved by careful selection and implementation of underwriting strategy guidelines, as well as the use of reinsurance arrangements. The Company purchases reinsurance as part of its risks mitigation program. Retention limits for the excess-of-loss reinsurances vary by product line. Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provision and are in accordance with the reinsurance contracts. Although the Company has reinsurance arrangements, it is not relieved of its direct obligations to its policyholders and thus a credit exposure exists with respect to ceded insurance, to the extent that any reinsurer is unable to meet its obligations assumed under such reinsurance agreements. The Company writes insurance primarily over a twelve-month duration. The most significant risks arise through high severity, low frequency events such as natural disasters or catastrophes. A concentration of risk may arise from insurance contracts issued in a specific geographic location since all insurance contracts are written in Ontario. The Company manages this risk via its underwriting and reinsurance strategy within an overall risk management framework. Exposures are limited by having documented underwriting limits and criteria. Pricing of property and liability policies are based on assumptions in regard to trends and past experience, in an attempt to correctly match policy revenue with exposed risk. Automobile premiums are subject to approval by the Financial Services Commission of Ontario, and therefore, may result in a delay in adjusting the pricing to exposed risk; in this case, the Company has policies regarding renewal and new business accepted. Reinsurance is purchased to mitigate the effect of the potential loss to the Company. Reinsurance is placed with Farm Mutual Reinsurance Plan Inc. (FMRP), a Canadian registered reinsurer. The Company follows a policy of underwriting with reinsuring contracts of insurance. The limit of liability of the Company is to a maximum amount of any one claim of 200,000 in the event of a property claim, 130,000 in the event of a liability claim and 165,000 in the event of an auto claim and 20,000 for Farmers Accident claims. For claims incurred over the respective limits, there is a 10% retention to a specified maximum for claims prior to 2012 and 100% is recovered for all claims in 2013 over the respective limit. In addition, the Company has obtained reinsurance which limits the Company's liability to approximately 475,000 in the event of a series of claims arising out of a single occurrence. The Company also has obtained stop loss reinsurance which limits the liability of all claims in a specific year to 80% of gross net earned premiums for all property, liability and automobile lines of business.

32 30 9. INSURANCE RISK MANAGEMENT (Cont'd) The Company is exposed to a pricing risk to the extent that unearned premiums are insufficient to meet the related future policy costs. Evaluation is performed regularly to estimate future claims costs, related expenses and expected profit in relation to unearned premiums. There was no premium deficiency at December 31, 2013 and The risks associated with insurance contracts are complex and subject to a number of variables which complicate quantitative sensitivity analysis. The Company uses various techniques based on past claims development experience to quantify these sensitivities. This includes indicators such as average claim cost, amount of claims occurrences, expected loss ratios and claims development as described in Note 5. Results of sensitivity testing based on expected loss ratios are as follows, shown gross and net of reinsurance on a pre-tax basis: 5% change in loss ratios Property Claims Auto Claims Liability Claims Gross claims change 269, , , ,857 38,316 38,941 Net claims change 218, , ,901 96,020 15,068 16,565 There have been no significant changes from the previous year in the exposure to risk or policies, procedures and methods used to measure the risk INVESTMENT AND OTHER INCOME Interest income 225, ,135 Dividend income 80,968 46,024 Realized and unrealized gains on fair value measurement 242,083 45,534 Other (21,962) 526, ,693

33 RELATED PARTY TRANSACTIONS The Company entered into the following transactions with key management personnel, which are defined by IAS 24, Related Party Disclosures, as those persons having authority and responsibility for planning, directing and controlling the activities of the Company including directors and management: Compensation Salary, wages, short-term employee benefits and director's fees 380, ,855 Premiums 55,549 47,461 Claims incurred 3,203 1,140 Amounts owing from and to key management personnel and directors (excluding compensation due and accrued) at December 31, 2013 are 5,047 (2012-2,132) and Nil ( Nil) respectively. The amounts owing are subject to regular payment terms for policyholders and are included in due from agents and policyholders on the balance sheet. 12. FINANCIAL RISKS AND CONCENTRATION OF RISK Credit Risk Credit risk is the risk of financial loss to the Company if a debtor fails to make payments of interest and principal when due. The Company is exposed to this risk relating to its fixed-income securities in its investment portfolio and the reliance on reinsurers to make payment when certain loss conditions are met. The Company's investment policy puts limits on the fixed-income securities including portfolio composition limits, issuer type limits and corporate sector limits. No foreign bonds are allowed and bonds must have a minimum credit rating of A. The maximum amount that may be invested in Guaranteed Investment Certificates may not exceed the amount guaranteed by the Canadian Deposit Insurance Corporation. All fixed income portfolios are monitored by management on a monthly basis and by the Board of Directors on a quarterly basis. Investment transactions are approved by any two of four specified management and Directors.